Designing Sustainable Service Models

Abstract

Taught as the second module in a Harvard Business School course on Managing Service Operations. Addresses the challenge of designing service models that effectively incorporate a customer operating role, as well as how to align operations to deliver value to both the firm and the customer. Also explores the role of customer discretionary behavior as well as developing mechanisms to influence.

Robert Venter, second-generation Chief Executive (CE) of family-owned Allied Electronics Corporation Ltd (Altron), considered the pros and cons of more clearly linking the firm's compensation system to sustainability performance. In June 2011, Altron, a conglomerate headquartered in Johannesburg, South Africa, controlled more than 200 companies in Africa, Europe, the US, the UK, Australia, and the Far East. More than 14,000 employees designed, developed, manufactured, and marketed a range of telecommunications, electronics, power electronics, and information technology systems and products. Having made a clear commitment to sustainable development, Venter was confident that the commitment was shared across the senior management team. However, there appeared to be more acceptance in the operating units for meeting financial targets than for meeting sustainability targets. Did the existing incentive structure send the correct message about the sustainability-oriented corporate strategy? Looking at the reshaped strategic themes, Venter considered the pros and cons of more clearly linking the firm's compensation system to sustainability performance.

On July 17, 2009, Zappos.com, a privately-held online retailer of shoes, clothing, and other soft-line retail categories, learned that Amazon.com, a $19 billion multinational online retailer, had won its Board of Directors' approval to offer to merge the two companies. Amazon had been courting Zappos since 2005, hoping a merger would enable Amazon to expand and strengthen its market share in soft-line retail categories. While Amazon's interest intrigued Zappos' senior executives, they had not felt the time was right—until now. Amazon's offer—10 million shares of stock (valued at $807 million), $40 million in cash, restricted stock units for Zappos' employees, and a promise that Zappos could operate as an independent subsidiary—was on the table. Zappos' financial advisor, Morgan Stanley, estimated the future equity value of an IPO to be between $650 million and $905 million; this estimate skewed the Amazon offer—at least in financial terms—toward the high end of Zappos' estimated market value. Hsieh and Lin, Zappos' CEO and COO, respectively, knew that much of Zappos' growth, and hence its value, had been due to the company's strong culture and obsessive emphasis on customer service. In 2009, they were focusing on the three C's—clothing, customer service, and company culture—the keys to the company's continued growth. Hsieh and Lin had only a few days to consider whether to recommend the merger to Zappos' board at their July 21 meeting.